Professor Alan Barrett:

I will deal with the second, third and fourth questions and Dr. McQuinn will take the first. We are taking a very cautious approach to the question of phasing out the USC. I gently said in the opening statement that we are not at all convinced that it is a good idea to phase it out, for a number of reasons. Globally speaking, we would be worried about anything that reduced the total tax take in Ireland at present. One might be able to make arguments for certain tweaks to the tax system and certain taxes that one might consider moving or substituting with other sources of revenue, but the universal social charge has a lot of desirable features. Obviously, everybody hates every sort of tax but as taxes go, it is very progressive and stable. After the crisis, the stability of tax law is something on which economists have become much more fixated. The charge is very effective from the point of view of getting in a lot of revenue. Why, therefore, would one abolish this of all taxes? Much of the political rhetoric around this is linked to the notion that it was introduced during the crisis and a belief that anything that came in as a result of the crisis can seamlessly be rolled back now that we are out of the crisis. However, we got into the crisis because we had very unstable tax revenues so it seems like a really bad idea. I use the term "we" but the ESRI never says anything. Individuals within the ESRI say things, however. The question of what might substitute for the USC or what might lose out does not arise as I do not think the charge should be reduced.

The strongest debate on fiscal space took place between the Irish Fiscal Advisory Council and the Department of Finance and they had differing perspectives. The Department of Finance does now adjust the fiscal space measure and adds in demographic pressures and the Lansdowne Road agreement. In the short term, the Department is probably doing a sufficient job in this area and I have consulted people from the Irish Fiscal Advisory Council on this, who agree that the €400 million adjustment is probably reasonable. The bigger point is that demographic projections are a longer-term issue. This goes back to the need to defend the current tax base. According to projections, demographic pressures on public finances will increase at a rapid rate beyond a certain point so anything we do now to soften or reduce the tax base will have very significant implications in the long term.

The final question was about capital investment, which has been low for a number of years. There is a lesson from history here. In the fiscal retrenchment of the 1980s, public capital investment fell to very low levels. Everybody in the room will understand that this was because it is the easiest expenditure to cut. There was an accumulation of non-spending so that, when growth finally started kicking in during the 1990s, all the talk was about the infrastructural deficit, as it was known at the time. It is clear to see that something similar could happen soon, if it is not already happening with issues around congestion. Housing is the crucial issue and with that come issues around water and other infrastructural investment associated with housing. People talk about the need to invest in housing but this implies an awful lot more besides.

We certainly see a need for infrastructural investment, given that it has been cut back for many years and still stands at a low proportion of GDP. On the question of what to do with the money in the budgetary package, one can invest and will have something to show for it, while one can decide not to invest if things get bad. The fear, however, is that we start reducing taxes and then have to raise them again or start spending money on current expenditure, for which there are otherwise, nevertheless, many good reasons to do so. With capital expenditure, one at least has something to show for it and can turn it off if necessary. There is a strong case to be made for expenditure in housing and associated areas.

While we decided in the past that we had to spend on capital infrastructure, we made the mistake of not ensuring that individual projects stood up to rigorous evaluation. The catch-all notion that capital expenditure is, always and everywhere, a good thing should not be allowed to filter into the discussion. There is a case for capital investment but projects should be evaluated on a case-by-case basis.